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1. Review of financial, economic and monetary developments and policy options
Financial market developments
Mr Cœuré reviewed recent financial market developments.
Since the Governing Council’s previous monetary policy meeting on 21-22 January 2015, the announcement of the ECB’s expanded asset purchase programme (APP) had had a significant impact on euro area financial markets, contributing to lower government bond yields and money market rates, particularly at longer maturities, while the euro had depreciated further against the US dollar especially in the days leading up to the meeting.
With the decision to expand the APP, augmenting the existing private sector asset purchase programmes with a public sector purchase programme (PSPP), euro area government bond yields had continued to trend lower, declining to all-time lows in most jurisdictions, with more bond yields turning negative since the 21-22 January meeting. At the same time, sovereign yield curves had flattened further. Intra-euro area sovereign yield spreads had narrowed after the initial widening recorded in the weeks following the January monetary policy meeting of the Governing Council. Market-based inflation expectations, for example as measured by the five-year forward inflation-linked swap rate five years ahead, had initially risen following the announcement of the expanded APP but had subsequently declined, reversing most of the increase, to stand marginally above 1.60% at the beginning of March.
Euro area equity markets had continued to perform strongly after the expanded APP announcement.
As regards the implementation of the programme, market participants had highlighted the potential scarcity of bonds to be purchased under the PSPP, citing two main factors. First, net issuance from euro area jurisdictions over the life of the programme was expected to be modest, as already reflected in the pricing of term repos at significantly negative levels in some markets, pointing to expected scarcity of certain types of collateral. Second, in the view of market participants, the euro area government bond investor base could be reluctant to sell its holdings due to regulatory constraints, a lack of attractive investment alternatives and institutional investors managing “buy-and-hold” portfolios.
Greek markets had experienced some episodes of high volatility in response to unfolding events, but contagion to other euro area government bond markets had remained limited.
Purchases under the third covered bond purchase programme (CBPP3) and the ABS purchase programme (ABSPP) had amounted to €51.2 billion and €3.5 billion respectively, as at Friday, 27 February 2015. In line with seasonal patterns, public issuance of covered bonds had rebounded in January and had remained sustained. The issuance had been more broad-based in terms of issuers and jurisdictions and also of a longer average maturity than previously observed. Secondary market spreads had continued to narrow for covered bonds across most euro area jurisdictions, particularly for Spain and Italy. Purchases under the ABSPP had remained low which, according to market participants, could be attributed to several factors. Supply had remained subdued, as many banks reportedly had more attractive funding alternatives than ABSs and saw limited scope for capital relief via ABS issuance given the absence of progress in the regulatory framework. A pick-up in new issuance was foreseen, while activity in the secondary ABS market was structurally thin and the market characterised by buy-and-hold behaviour.
As regards Eurosystem credit operations, the maturity of the two three-year longer-term refinancing operations (LTROs) on 29 January and 26 February 2015 had not had much of an impact on the level of excess liquidity, as the maturing operations had been, to a large extent, rolled over into shorter Eurosystem liquidity-providing operations. Furthermore, developments in autonomous factors had also affected the level of excess liquidity favourably. Combined with the monetary policy decisions taken at the 21-22 January meeting, the level of excess liquidity had put further downward pressure on money market rates. Since then, the three-month EURIBOR and the one-year EURIBOR had continued to decline and had reached new lows of 3.8 basis points and 2.3 basis points respectively, in part reflecting expectations of ample excess liquidity going forward. The EONIA had stood at levels between -4 and -6 basis points for most of the period, not far from the historical low of -8.5 basis points. In the repo markets, short-term rates for general collateral had stood between -10 basis points and -15 basis points.
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The global environment and economic and monetary developments in the euro area
Mr Praet reviewed the global environment and recent economic and monetary developments in the euro area.
The recovery in the global economy was expected to continue but to remain uneven across regions. After weakening slightly in the fourth quarter of 2014, the momentum of global growth had shown signs of stabilising in early 2015, supported by previous declines in oil prices. Similarly, the global Purchasing Managers’ Index (PMI) for new export orders pointed to sustained growth at the start of 2015, after some moderation in the fourth quarter of 2014. Annual OECD CPI inflation had fallen to 0.5% in January 2015, driven by a negative contribution from energy prices, although excluding food and energy it had decreased only slightly to 1.7%. Since the Governing Council’s monetary policy meeting on 21-22 January 2015, Brent crude oil prices had risen by 26% to stand at around USD 61 per barrel on 3 March 2015, still roughly 50% below their mid-2014 peak. Non-energy commodity prices had declined by 3%, mainly owing to developments in metal prices. The euro had depreciated by 4% in bilateral terms against the US dollar and by 2.2% in nominal effective terms.
For the euro area, real GDP had risen by 0.3%, quarter on quarter, in the fourth quarter of 2014. While no breakdown was as yet available, short-term indicators and available country data suggested that both domestic demand and exports had continued to provide impetus to growth. The modest growth dynamics in the euro area over recent quarters had mainly been driven by low investment activity in the context of continued weak corporate profits, ample spare capacity and uncertainty about the growth outlook. Although output had been growing in recent quarters and the unemployment rate had been declining from its peak in 2013, there was still considerable slack in the economy.
Available indicators pointed to an ongoing economic recovery at the beginning of 2015. The composite output PMI and the European Commission’s economic sentiment indicator had improved in both January and February and stood, on average, above their respective levels in the fourth quarter of 2014. Private consumption dynamics appeared to have held up, as both the volume of retail sales and new car registrations had risen sharply in January. In addition, consumer confidence had risen markedly in January and February, reaching pre-crisis levels.
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2. Governing Council’s discussion and monetary policy decisions
Economic and monetary analyses
With regard to the economic analysis, the members of the Governing Council generally shared the assessment of the outlook and risks for economic activity in the euro area provided by Mr Praet in his introduction. The latest economic data and, particularly, survey evidence available up to February 2015 were seen as pointing to a further improvement in economic activity at the beginning of the year.
The various monetary policy measures taken by the Governing Council – including previous measures and the recently expanded APP – seemed to have contributed to this general improvement, notably supporting confidence as an important channel in the transmission of monetary policy. There also seemed to be clearer evidence that the past decline in oil prices had had a positive impact on aggregate demand in the short term, while the stimulative growth effect of the euro’s depreciation was likely to unfold with some delay. Overall, the evidence was seen as suggesting a gradual broadening and strengthening of the euro area economy going forward.
This assessment was also broadly reflected in the March 2015 ECB staff macroeconomic projections for the euro area, as reported by Mr Praet. Predicated, as they were, on the full implementation of all the measures that had been decided since June 2014, the projections were seen to underpin the Governing Council’s commitment and confidence in the effectiveness of the measures, which had since been corroborated by a broad range of financial market variables.
Members took note of the inclusion in the current projection baseline, unlike in previous projection exercises, of the full impact of the non-standard monetary policy measures, which also took into account financial transmission channels not normally captured by the standard projection framework, in addition to effects through the technical assumptions about interest rates, exchange rates and stock prices. The impact of the announcement of the expanded APP on the projections via the technical assumptions had accounted for a significant part of the upward revisions. In this respect, the importance of the methodological step capturing additional financial transmission channels should not be overstated, given the rather limited quantitative impact.
In complementing their considerations of the baseline projections, members exchanged a number of views on the growth outlook. In line with Mr Praet’s presentation, the cyclical nature of the projected acceleration in growth was emphasised, with potential growth remaining rather modest, underscoring the need for structural reforms to bring about an improvement in potential growth. In addition, it was remarked that the growth outlook for 2017 depended on a number of factors that might become less growth-supportive towards the end of the projection horizon.
Specifically, it was not clear to what extent monetary policy would still be as supportive in 2017, taking into account that the monthly purchases of euro area securities under the expanded APP were intended to last until the end of September 2016 and, in any case, until the Governing Council saw a sustained adjustment in the path of inflation consistent with the aim of achieving inflation rates below, but close to, 2%. Moreover, the pick-up in growth over the projection horizon depended on the assumptions of continued low oil prices and a further strengthening in foreign trade. In this regard, the argument was put forward that oil price developments might turn out to be stronger than currently assumed if global demand were to improve considerably. In addition, growth might also be constrained by structural bottlenecks in some countries.